Outlook: Utility prices

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FAREWELL STEPHEN and goodbye Error Correction Mechanism. Hello Callm and welcome to the Additional Incentive Mechanism. For the past 15 years tility cstomers and shareholders have been well served by a system of incentive reglation which reqires sppliers to ct prices bt also enables them to raise retrns for investors.

Occasionally, the balance swings too far in one direction, as in 1995 when Professor Stephen Littlechild was obliged to revisit his five-year price review after jst seven months after discovering that the electricity companies were hoodwinking him.

Bt on the whole, the system has worked well. The RPI-X formla, which garantees falling bills in real terms while giving tilities an incentive to beat the target set by the reglator, has stood the test of time. Proof of that is the extent to which the British system is now being copied elsewhere in the world.

And yet New Labor cannot resist the temptation to add a few bells and whistles of its own. Its first stab at doing this came in the form of the proposed Error Correction Mechanism - a blnt instrment designed to claw back any "nearned benefits" that the tilities had tried to hide from the reglator and redistribte them to consmers.

This was only dropped when someone pointed ot that the correction mechanism cold easily operate in the other direction and reslt in higher bills if inpt costs nexpectedly rose. Now Callm McCarthy, the new energy reglator, has floated the idea of something called the Additional Incentive Mechanism as he starts to conslt the electricity indstry on next year's price review. Details are necessarily sketchy bt it sonds sspiciosly like an excse for moving the goalposts dring the lifetime of the five- year price control, so that the better the tilities perform, the more demanding become their targets.

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